Mar

10

A recent talk by Brink Lindsay at the Junto was a perfect example of what should not happen at a talk. It consisted of a sophistic proof that Krugman's thesis that some post war years were much more golden than some more recent years because of more government regulation and greater equality is mispecified.

There were so many things wrong with the talk. The audience was totally inappropriate for the talk. It was a spread sheet, power point presentation where none of the audience could see it, understand the data points, or check the veracity. Even if the premises had been worth discussing, it would have been totally wasteful. No wonder so many people fell asleep, left the talk, vowed never to come back to the Junto, and were completely silent.

However, worse yet, the premises themselves of the talk were completely off base. The basic idea rested on two premises. That some 25 year period after World War II had higher growth, and that it was caused by more intrusive government. How in the world someone could say that gov. was more intrusive in that period than now is ridiculous. There are hundreds of measures of government intervention that could be used, and almost all of them would show that gov. is more intrusive today. Take government as a share of the economy, or the extent of the federal register, or the tax revenues taken as a share of income, or the extent of entitlements and unfunded debt, or the share of cronyism.

Second, the talk was filled with selection bias and data bias. Of course you can take a measure like productivity or pre tax income and find 4 points, a starting point, an ending point x year later, another starting point a few years after that and another ending point, where based on some opaque measure of income, there was a small differential in the growth rates. It has to be true with random numbers.

Hopefully, I will never subject the valuable time and efforts of the Junto attendees to anther talk like this, and that Brink who is a reasonable scholar and has written many good books will not waste the time of audiences in the future with sophistic and inappropriate talks like this in the future.

Here's a good discussion of government intervention which it would have been useful to use as a foundation and base, and would have given the audience something useful to take home with them. I see tables on federal spending per cpta, cabinet departments, human resources, a breakdown of federal expenditures by sector showing that physical resources shares has increased, state and local government expenditures, vote trading, bundling, and government size, and many other valuable topics. It's a model of what a talk to a general audience should have covered.

Brink Lindsey responds:

Dear Vic,

Thanks for writing — I appreciate the opportunity for follow-up discussion. And thanks for sending along the article from the St. Louis Fed — it is very interesting and I had not seen it before.

I do not believe, though, that the article in question supports your objections to my analysis. Yes, real government spending, both overall and per capita, has been on a steadily upward trend. But if we are looking at the effect of government spending on growth — and it was the effect of government policy on growth that I was addressing in my talk — then the proper measure is government spending as a percentage of GDP. The only relevant figure in the article is Figure 3, which shows only federal spending as a percentage of GDP, and it shows that federal spending fluctuated fairly stably between 15 and 20 percent of GDP through both the Golden Age and the Long Boom. No increase at all till the Great Recession. The composition of spending changed signficantly — from heavy on defense to heavy on entitlement spending — but the implications of that composition shift for growth are unclear.

Total government spending was somewhat higher in the Long Boom than in the Golden Age — around 35 percent of GDP on average as compared to around 30 percent. That rise is mostly due to a big increase in state and local spending on education.

But surely this isn't the answer to the puzzle. However you want to measure overall economic performance — the growth rate of GDP per capita, labor productivity (GDP per worker hour), or total factor productivity (GDP per unit of labor and capital) — the Golden Age beat the Long Boom hands down. The slides I presented didn't satisfy you on this front, but I challenge you to find any measure of overall economic performance that shows the Long Boom outperformed the Golden Age. Here, for example, is a chart on labor productivity.

Not even in the period of fastest productivity growth during the Long Boom (2000-2007) did growth equal the average productivity growth rate during the Golden Age. And I can't even imagine an argument which ascribes all or most of the fall in performance to rising state and local government spending.

Government spending on its own can negatively impact growth by supplanting private activity in an area — e.g., crowding out private schools with government schools. But in general, providing free stuff to people doesn't darken their economic prospects; the real problem lies in having to pay for all that stuff with taxes. However, if we compare the tax regimes of the Golden Age and the Long Boom, I think Golden Age tax policy, with its confiscatory high marginal rates, was more distortive and anti-growth than tax policy since the 1981 Reagan tax cuts. I don't even know what the argument would be for the other side.

So if you are correct and overall government policy in the Long Boom really was much more anti-growth than in the Golden Age, the main culprits must be found on in regulatory policy, not spending levels. I'm afraid that all attempts to quantify the burden of regulation are more or less problematic, and all rest ultimately on qualitative judgments about the effects of this or that regulatory policy. What we can say for sure is that there was a significant shift in the composition of regulation since the 1970s — a dramatic reduction in old-style "economic" regulation of prices and entry, counteracted by a big increase in "social" regulation of health, safety, and the environment. Old-style regulation directly restricted or prohibited entrepreneurial entry and blocked the transmission of market price signals; by contrast, social regulation merely burdens competition with extra costs. Add the fact that health, safety, and environmental regulation's main brunt is borne by economic sectors that are shrinking in importance for other reasons (specifically, manufacturing), and I believe the balance of evidence clearly favors the conclusion that the overall regulatory environment of the Long Boom was less hostile to growth than was the overall regulatory environment of the Golden Age.

So, as I read the evidence, the puzzle still remains. Thus my search for non-policy reasons why the Golden Age outperformed the Long Boom. Perhaps you still find all of this utterly unconvincing, but at least I hope you understand a little better where I'm coming from.